Recovery ahead in China
Giordano is a high-yield stock which offers steady earnings growth, courtesy of robust sales in Asia Pacific and the Middle East. It is set return to growth in China in FY14, fuelled by new stores and store upgrade/relocation.
Under our revised rating structure, our call changes from Outperform to Add. We retain our target price as we continue to value the stock at 13.5x CY15 P/E, a 10% discount to its 10-year average. Share catalysts are a sales recovery in China and sustainable gross margin expansion.
Decent growth ahead
Giordano is one of the most well-known and established apparel retailers in the Asia Pacific. In Sep 13, the group operated 2,615 outlets in over 30 territories worldwide, of which 1,168 outlets were in China. Giordano’s lacklustre performance in China in the past two years due to inventory clearance by its rivals has dragged down its overall performance. We believe that China will return to growth due to improving retail spending and the completion of its network consolidation. We expect continued steady sales growth in Hong Kong and robust growth in Asia Pacific due to strong economic growth. The Middle East will be the new growth driver given the low store penetration rate. We note though that it accounts for only ~10% of group profit currently.
China resumes growth
In 9M12, the group further cut 75 non-performing stores in China, making it a total of 204 stores closed in the past two years in order to enhance overall profitability. On completion of the two-year consolidation, we believe that China will deliver sales growth again and profitability will be continuously improved in FY14 due to 1) net store addition, driven by a refined women’s line and portfolio expansion from A-grade franchises, 2) renovation of more stores, and 3) relocation of low-profitability stores in low-end areas to premium-grade department stores and shopping malls.
A balance the growth
We like Giordano’s well-diversified store portfolio that enables it to deliver stable topline growth by reducing concentration risk. We believe Giordano will continue its generous dividend policy of 75-80% payout, thanks to its strong free cash flow and balance sheet. We forecast 11% EPS CAGR for FY12-15, coming from 7% revenue CAGR, margin resilience and operating leverage.